Monthly Archives: April 2015

GMX Resources, Fraudulent Transfers, Corporate Dividends and Bankruptcy

A bunch of people are getting sued in an Oklahoma bankruptcy court, because they received dividends paid to them as holders of priority stock in GMX Resources, Inc. which subsequently filed for Bankruptcy. I have to admit that when I heard this even I scratched my head a bit. This case is so strange that it took me a while even to figure out who the Plaintiff, one John P. Madden as Trustee of the GMX Resources Creditors Trust, was and what the heck he had to do with this. It took me a little while longer to figure out why I think that these cases should all be defensible by the stock holders. My defense strategy is complicated, but I am making sure that it is cost effective for even relatively small stock holders. So, if you have received a Summons and Complaint from John P. Madden – contact me or another attorney well versed in fraudulent transfer defense soon. As is generally the case when you get sued, time is not on your side.

The cause of action involved in these cases is a poorly named concept, “fraudulent transfer”. There are a number of varieties of a fraudulent transfer, some of which involve actual fraud; but the most common (and the one at issue here) doesn’t usually involve real fraud. To boil it down to its most basic elements, this variety of fraudulent transfer is:

  • A transfer of an asset (cash dividend);
  • Made for less than fair consideration (i.e., akin to a gift, no value received in exchange);
  • At a time when the transferor (GMX Resources) was insolvent; and
  • Made within two years (four years under the State law Uniform Fraudulent Transfers law) of the time the transferor (GMX Resources) filed for Bankruptcy.

Basically, the idea is that you don’t want people transferring assets without getting fair value back in return (kind of, giving stuff away) if they can’t afford to pay their creditors. In the context of a typical consumer fraudulent transfer case, why should a debtor give his old car worth $4,000 – $5,000 away to a friend when he can’t pay his creditors? Shouldn’t he have sold the car and paid his bills? So, the Bankruptcy Code allows for his Bankruptcy Trustee to get the car back, sell it and distribute the money out to the creditors. That fact scenario seems less offensive – unless, of course, you are the friend who was given the car!

What makes fraudulent transfers so much fun is that it is relatively easy for a Trustee to make what is called a prima facie case that the transfer should be avoided. Basically, that means a case that on its face is sufficient to support the cause of action. That is not the same thing as saying that the Trustee should automatically win. There are a number of defenses to fraudulent transfer actions, several of which I think are applicable to the case at bar.

One of the things that I think the Trustee is counting on in this case is that at first blush it looks like defending these cases is going to be outrageously expensive. I respectfully disagree.

Any lawyer who has been out of school for more than six months will tell you that any time you walk into a courtroom anything can happen. There are never any guaranties, and generally both sides are equally convinced that they are absolutely right. Still, there are some facts in this case that make the Trustee’s argument less than compelling; and if you have been sued or if you represent someone who has – give me a call. My contact information is in the right hand column.

Elaine

Lawsuits, Bankruptcy and the Automatic Stay

A bankruptcy filing automatically stays (or temporarily stops) all collection activity against the debtor or property of the debtor; and that includes virtually all lawsuits involving the debtor. That is the easy answer. Yes, a bankruptcy filing will stop that lawsuit against you! It just isn’t always the whole answer.

Most of the time when people call they are asking about a simple collection case – an old credit card, medical bills, maybe the balance due after a repossession. In those cases a bankruptcy filing stays the lawsuit; and when the discharge is entered a few months later, the lawsuit is stopped for good. That answer is accurate for the vast majority of callers. So, if you are worried about a simple collection case, a Bankruptcy will fix it.

The problem comes when whomever answers the phone in the law office doesn’t ask enough questions. If the lawsuit isn’t a simple collection case, for instance, if the person calling is being sued by a former employer for stealing or embezzling money. If the lawsuit is alleging any type of fraud. If the lawsuit is alleging intentional and willful injury to property. If the lawsuit is a paternity action or an attempt to collect past due child support or alimony. Those lawsuits won’t just go away, although the Bankruptcy filing will slow them down some. The worst scenario, though, is a case that looks look like a simple breach of contract case or maybe simple negligence, it may be between former business partners or friends; but the case has gotten emotional and angry and it has become more about a pound of flesh than recovering specific economic damages. In other words, the worst case scenario is a lawsuit that has started to look more like a divorce than normal litigation.

In those cases the answer is still correct that a Bankruptcy filing will stay the lawsuit – it just might not end it, and it really might not stop the fight.

The Bankruptcy Code includes a list of things that are excepted from the Debtor’s discharge. That means that even though the Automatic Stay might stay the problem, when the stay is replaced by the discharge, this type of problem will still be there – waiting. The most common of these are debts incurred shortly before the bankruptcy was filed (presumably with the intention of filing bankruptcy and not paying it), student loans, recent taxes, child support or alimony.

Some of these require that something called an Adversary Proceeding be filed within the bankruptcy. Some of them don’t; and some times the creditor may just cause other problems within the bankruptcy. Stay tuned for more on this subject. I will tag these posts as “persistent creditors” to make them easy to find.

Elaine

Grace, Debt and Forgiveness

I’m a bankruptcy lawyer, and I practice in the Bible belt. That isn’t really a fair statement. Practicing law isn’t really what I do. It is who I am. In the words of Micah I am called to seek justice.  Although, I can’t tell you how many times I have been grateful that I’m called to “seek” justice – not necessarily to find it.

Still, when Rachel Held Evans sent out a call for volunteers to help launch her latest book, Searching for Sunday, I volunteered. Rachel’s books are about finding grace in the midst of condemnation and hope flying in the face of everything you thought you knew – and my clients need that.

He remembered that what makes the gospel offensive isn’t who it keeps out, but who it lets in. Nothing could prevent the eunuch from being baptized, for the mountains of obstruction had been plowed down, the rocky hills had been made smooth, and God had cleared a path. There was holy water everywhere.  Searching for Sunday.

My clients need to be reminded that bankruptcy was God’s invention. If you don’t believe me, try reading Leviticus. Then, over the course of a Testament and a millennium or so (give or take) he refined this concept of forgiveness until it became a concept called grace. The sad thing is that the clients who most need to hear this are the very clients who wind up in my office because they insisted on taking care of their children instead of paying their credit cards – or, to quote Rachel:

I became a stranger to the busy, avuncular God who arranged parking spaces for my friends and took prayer requests for weather and election outcomes while leaving thirty thousand children to die each day from preventable disease.  Searching for Sunday. 

I spent a long time trying to come up with a way to elegantly tie a post about this book with my usual law office centric kind of stuff. I gave up. If you are here reading this, you need to hear about acceptance and grace and questions and doubt and love and belonging and grace and forgiveness.

An African American man in a wheelchair followed and brought the house down when he approached the mic, waited a moment, and declared, “I’m black. I’m disabled. I’m gay. And I live in Mississippi. What was God thinking?”  Searching for Sunday. 

Rachel Held Evans has documented her journey from an evangelical, I’ve got all the answers, unquestioning faith to what I consider to be a more mature faith. This book is the second half of that journey, and in this book, she is trying to get her head around the concept of sacraments and at the same time find a church community that resonates with the answers she is looking for.

The church is God saying: “I’m throwing a banquet, and all these mismatched, messed-up people are invited. Here, have some wine.”  Searching for Sunday.

Her answers aren’t my answers, and they won’t be your answers. The questions and the journey, though, are universal.

All we have is this church—this lousy, screwed-up, glorious church—which, by God’s grace, is enough.  Searching for Sunday. 

Searching for Sunday: Loving, Leaving and Finding the Church, by Rachel held Evans.  (That is an Amazon link, but it is not an affiliate link.  I was given an advance copy of the book for review purposes.)

Elaine

Afraid to File Your Taxes?

Trust me. I get it. Lots of us are afraid to file our tax returns – well, ok, afraid to prepare them may be closer to the truth; but, trust me, I get it.

– and it just got worse.

Not filing your taxes has always been bad. Filing late has always had some consequences, but most of them were manageable. Now, there is a new one.

In the last week of 2014 the 10th Circuit Court of Appeals handed down an opinion agreeing with an earlier decision from the 5th Circuit. So far, they are the only two circuits to hear this particular issue; and they agree. This is not good.

Here is the problem. Generally, speaking income taxes are dischargeable in a bankruptcy proceeding provided that they meet certain requirements. Like with anything involving either the Bankruptcy Code or the Tax Code (let alone both), there are more rules, limitations and exceptions to the basic rules than holes in Swiss cheese. Still, generally speaking, if the taxes meet certain age tests they are dischargeable in a bankruptcy filing – any chapter. Well, the 10th Circuit, following the 5th, has added a new wrinkle.

According to these Courts if the returns were filed so much as a day after they are due, the taxes on those returns are never dischargeable in a Bankrutpcy. Of course, if they are filed before the expiration of a properly granted extension, they are not late. If they are filed after the extension expires, however, or if no extension is granted; then, we have a whole new problem.

I have a case right now where a client has filed a bankruptcy, and taxes are a major part of the debt. I just went through every one of her tax transcripts. One of those returns was filed late. Anywhere inside the 5th or 10th Circuits the taxes on that return are not only not dischargeable in this Bankruptcy – they will never be eligible for a discharge. Oh, and the date on that return? Filed less than two weeks after April 15, and no request for extension was filed.

This seriously sucks.

Elaine